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Pipeline Bottlenecks Will Continue To Discount Price For Canadian Crude: CIBC

Longer term constraints risk stranding over a million barrels a day of potential oil growth

CALGARY, Dec. 17, 2012 /CNW/ - While pipeline expansion in 2013 will add nearly a million barrels a day of capacity, it won't be enough to eliminate the discount Canadian producers are getting for their oil, finds a new report from CIBC World Markets.

The report notes that while the consensus view is the new Seaway expansion (250,000 barrels a day in Q1/2013) and the south portion of Keystone XL (700,000 barrels a day in late 2013) will solve the pricing gap faced by Canadian producers, detailed analysis shows otherwise.

"In our view, they will help narrow the Brent-West Texas Intermediate discount but that discount will remain in the US$10 a barrel range," says CIBC oil and gas equity analyst, Andrew Potter. "Our rationale is that these new pipes simply push the current (Midwest) PADD 2 glut into (Gulf Coast) PADD 3, which will knock out PADD 3 light oil imports in early 2013 and prompt Light Louisiana Sweet (LLS) pricing on the Gulf Coast to begin discounting vs. Brent.

"We believe LLS will move to an approximately US$5 a barrel discount vs. Brent. And WTI will move to a transportation discount vs. LLS of approximately US$5 a barrel, leading to a long-term Brent-WTI differential of US$10 a barrel. We believe consensus expectations overstate the value of domestic oil producer exposed to this theme and understate valuations of Brent-exposed and downstream-exposed producers."

Mr. Potter says the bank's modeling shows North American oil production can grow by approximately 800,000 barrels a day per year through 2016. The growth can be distilled down to approximately 500,000 barrels a day per year from U.S. on-shore oil; ~45,000 barrels a day per year from U.S. offshore; ~100,000 bbl/d per year from Canadian light oil; and ~230,000 barrels a day per year from the oil sands. Over this same period this growth is offset by ~100,000 barrels a day per year decline in Mexican production.

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